Public Equities

Software’s Big Bang

August 2021 – 6 min read
An important transformation is happening in the software industry today, which is likely to see the sector’s growth continue to outpace the rest of the IT industry—and the broader economy—for many years to come.

The software sector has struggled to outperform the broader market over the past year, despite the COVID-induced reappraisal by businesses which revealed just how much they need to grow their investment in their own technology resources. Fears of a rise in bond yields—and as a result, the discount rates for secular growth companies trading at high multiples—have dominated the narrative since vaccine approvals and the reopening of economies caught everyone’s attention. However, the underlying growth and long-term outlook for the sector has, if anything, improved markedly, which is setting up for transformative change in the software industry in the years ahead.

Digital Disruption

In our view, the most important industry transformation happening today is in the software industry. The large, monolithic applications sold by some of the biggest software names of yesteryear, such as Oracle, SAP and IBM, have matured enough that they offer less and less in terms of incremental efficiency gains per dollar of investment. Fixed asset investment in IT in the U.S. has therefore stagnated in terms of share of investment spending since the early 2000s. 

The most significant applications control critical business functions including finance, supply chain management and customer relations, and have dominated the IT budgets of enterprises for decades. Competitive pressures in a global economy are forcing a search for new and innovative solutions to drive business growth and profitability.

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Matthew Ward

Head of Global Technology Equities

Colin Moar

Investment Manager, Global Equities—Technology

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